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ATO issues new ruling on tax resident tests for individuals

On 6 October 2022 the ATO issued a draft ruling for public consultation, dealing with its view of the four tests for an individual to be a tax resident of Australia. On 7 June 2023, the Australian Taxation Office (ATO) issued Taxation Ruling TR 2023/1, updating its public views on the application of the tests for determining whether an individual is a resident of Australia for income tax purposes. The ruling seeks to consolidate and replace some older rulings on this issue and incorporate recent court decisions referred to in the draft ruling, in particular:

  • Harding [2019] FCAFC 29 and Pike [2020] FCAFC 158 (which dealt with the "resides" and "domicile" tests from the perspective of an individual working overseas); and
  • Addy [2020] FCAFC 135 (which dealt with an individual visiting Australia).

Any New Zealanders who are spending time in Australia should ensure they understand when Australian tax residency may be triggered and seek advice to understand the consequences.

Four tests for individual tax residency

There are four statutory tests for determining whether an individual is a resident of Australia for income tax purposes:

  1. The "ordinary concepts" test (an individual is resident if they reside in Australia under the "ordinary meaning" of the word reside);
  2. The domicile test (an individual is resident if their domicile is in Australia, unless they can satisfy the Commissioner of Taxation that their "permanent place of abode" is outside Australia);
  3. The so-called "183-day" test (an individual is resident if they are physically present in Australia for more than one-half of the Australian tax year, unless they can satisfy the Commissioner of Taxation that their "usual place of abode" is outside Australia and that they do not intend to become a resident of Australia); and
  4. The commonwealth superannuation fund test (an individual is resident if they, or their spouse or dependent child under 16 years, is either: (i) a member of the superannuation scheme established by deed under the Superannuation Act 1990 or (ii) an eligible employee for the purposes of the Superannuation Act 1976).

If an individual meets any of those tests, they are considered tax resident in Australia, and subject to Australian income tax on income and capital gains from Australia and overseas, unless they qualify for tax relief:

  • As a "temporary resident;" and/or
  • Under the terms of a double taxation agreement between Australia and another jurisdiction.

TR 2023/1 is broadly consistent with the earlier rulings while adding examples which reflect the recent court decisions.

The ruling notes that tax residence is often a question of fact, and similar facts do not always result in the same outcome. However, the ruling suggests:

  • For an individual visiting Australia, it likely requires at least six months presence in Australia (actual presence or intention to treat Australia as their home) to determine whether their actions support their being resident under the ordinary concepts test. This can occur even though the individual may have connections to, or be resident in, another country. Shorter periods than six months may be sufficient if other circumstances support the necessary connection and objective intention to reside in Australia (e.g. if the individual has spent longer periods in Australia in prior or later years).

  • For an individual moving away from Australia,
    • The domicile test likely requires an intention to remain overseas in the same location for at least two years to:
      • Establish the necessary "permanence" of their abode in that overseas location; and
      • Show they have "abandoned" their Australian residence.
    • The resides test could still apply even where they spend more time overseas than in Australia, if for example, they return to Australia at intervals to an established family and social life, and where the oversea employment or business activities could be (and are) undertaken in Australia or overseas.
  • For an individual visiting Australia, the 183-day test does not require that the taxpayer maintain a foreign home to have a usual place of abode in an overseas location—an intention to return to that locality would likely be sufficient to show their usual place of abode is at that overseas location.

The ATO also confirms its general position that short-term temporary workers (such as seasonal workers and working holidaymakers) are more likely to remain non-residents, even if they are in Australia for more than 183 days. This is because a seasonal or working holiday visa suggests the holder is intending to visit Australia for a specific purpose and period. This may have less significance where they can show an intention to remain in Australia more permanently (for example, by seeking a sponsored temporary work visa).

The ruling explicitly states that it does not address or discuss in detail the fourth test (the commonwealth superannuation fund test). It also does not deal with the interpretation of the tie-breaker article in Australia's double taxation agreements.

Tax residence is a key determinant of whether Australia taxes worldwide income and capital gains or only Australian income and gains from selling "taxable Australian property" such as Australian real estate. Ambiguity creates significant uncertainty for those travelling to and from Australia in a time when cross-border arrangements have grown.

The additional clarification provided by the ruling is welcome, given the previous rulings had been issued more than 20 years ago and did not reflect recent case law. That said, there is still significant ambiguity around the application of these tests (even though, in the case of the first three tests, they have applied for more than 80 years).

Further, we are awaiting a decision from the Australian government on whether they will legislate new tax rules to replace these four tests, following on the announcement by the previous government in the 2021-22 Federal Budget in May 2021. The announced measures essentially lapsed with the change of government in May 2022, and comments from the assistant treasurer in 2022 suggested the new government could seek to continue to pursue reforms in this area.

It is to be hoped such reforms will provide clarity and certainty for taxpayers, important in keeping Australia competitive from a workforce perspective while being fit for purpose in a post-COVID-19 business environment.

As discussed in our June Tax Alert article on the potential Australian tax issues for New Zealanders considering Australian citizenship, this ATO ruling reminds us that the tax residency rules in Australia are not the same as the New Zealand rules.

The New Zealand primary tax residency test is the “permanent place of abode (PPOA)” test. This test measures if there is “a place where a taxpayer habitually resides from time to time even if they spend periods of time overseas”. Deciding if a person has a PPOA in New Zealand requires an overall assessment of the person’s circumstances and the nature and quality of the use the person habitually makes of the place of abode. It is necessary to consider the continuity and duration of the person’s presence in New Zealand and the durability of the person’s association with their dwelling here and how close their connection with it is.

If residency is not met under the PPOA test we then turn to the secondary tax residency test, the “days test” or the “183-day rule”. If a person is present in New Zealand for more than 183 days in total in any 12-month period, they will be a New Zealand tax resident. The days of presence do not need to be consecutive.

Losing New Zealand tax resident status requires a person to both no longer have a PPOA in New Zealand and to be absent from New Zealand for more than 325 days in a 12-month period. People leaving New Zealand who are reluctant to sell their family home, or who make return visits for personal or business reasons exceeding 6 weeks a year, may find that they do not cease being New Zealand tax residents even if they have moved their family life to Australia (or elsewhere). While the tiebreaker test in the double tax agreement will provide relief from double tax, being a tax resident under both countries’ tax rules can result in some complications and unexpected outcomes when filing tax returns.

So, if a move to Australia, or Australian citizenship, is something you are considering we recommend you contact your usual Deloitte tax advisor for guidance first.

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